EU approves $9.9 billion rescue of Italian bank

ROME–The European Commission has cleared the way for the multibillion-dollar government rescue of one of Italy’s biggest and most fragile banks by approving a restructuring plan for the troubled lender.

The agreement caps months of talks between Italy and European authorities over the terms of the bailout of Banca Monte dei Paschi di Siena SpA.

In focus were doubts over the bank’s plan to put it on a sufficiently smooth road to recovery, after management failed to raise private funds by a December deadline to fill the hole in the lender’s balance sheet.

MPS faces a capital shortfall of EUR8.8 billion ($9.9 billion), set to be partially made up by converting around EUR2 billion in junior bonds into equity. The rest will come from the Italian government, which will end up owning a 70% stake in the bank.

In parallel with the capital injection, the bank has to implement a restructuring plan aimed at returning it to profitability in the long term. The credibility of the plan is crucial. Italy will be using a particular type of European bailout, known as precautionary recapitalization, designed to shield taxpayers from the cost of bank failures in the case of solvent banks that aren’t at risk of posting big future losses.

“This solution is a positive step forward for MPS and the Italian banking sector,” said EU Commissioner Margrethe Vestager.

“MPS will undergo deep restructuring to ensure its viability, including by cleaning its balance sheet from nonperforming loans,” Ms. Vestager said.

The restructuring plan hinges on heavy expenses cuts, including personnel costs, say people familiar with the matter, and the sale of around EUR26 billion worth of toxic loans.

Earlier this week the bank said it has entered into exclusive talks about the sale of such portfolio of bad loans with a group of investors, headed by Quaestio Capital Management SGR SpA, which manages a rescue fund for banks financed mainly by healthier Italian lenders called Atlante II. The exclusivity will be granted until June 28.

The bank will unveil the details of the plan in June and the government may take control of the bank by the beginning of August, said a person familiar with the matter.

The Commission said its approval is subject to the confirmation by the European Central Bank, which supervises Europe’s largest lenders, that MPS is solvent and meets regulatory requirements for bank capital. Rome also has to obtain formal confirmation by private investors on their purchase of the bank’s bad loans.